Tuesday, April 23, 2013

Everyone working in real estate, buying real estate, or selling real estate has been commenting on the inventory shortage which has pushed prices upwards. Home prices in March edged up almost 12% higher than they were a year ago. The best advice that can be given is caution, especially for short term investors. I will cover the important aspects of that advice here.

Lack of Inventory
Do not buy a house just because it is the best property you can find. Too many investors are “settling” for properties because of the lack of inventory. This is a big mistake and will contribute to a new bust in the future. If you cannot find the right deal, do not jump into something that you’re not completely sure of.

Interest Rates
The low interest rates that have prevailed over the last 3 years will not last forever and slight increases will have a dramatic effect on prices and purchasing power. With current interest rates in the high 3% range, $1,000 could buy a $220,000+ property. In 2006, when interest rates were in the 6% range, that would only cover a $165,000 house. I foresee interest rates ticking up starting now, in an effort by the Federal Reserve to “slow down” the housing recovery.

Recovery Personal Credit and Increased Values
Buyers who went through a bankruptcy, a foreclosure, or a short sale are now getting back into the market which is putting more pressure on prices as demand increases. Here at FK Capital Fund, we are doing more loans than ever for borrowers who have had these problems in the past. The conventional market will follow and it will further heat up the housing market. Additionally, homeowners who have held out through the last several years with underwater properties are now able to sell their homes for ever-increasing prices.

Investors Have Made a Lot of Money
Part of the problem that led to the Great Depression was that regular non-investors were seeing the massive amounts of profits investors were making in the market. This made them want to participate. They were uninformed which distorted the market further and caused the eventual collapse. This is especially true now with “investors” calling us every day for loans that have never invested in anything before.

There are still quality investments to be made, but they should be made with an extra degree of caution.

Tuesday, April 16, 2013

The upturn in the real estate market has caused investors and fund managers to underwrite a little more cautiously, especially with talks concerning a new housing bubble already starting as seen here and here.

With the market languishing for so many years after the recession, underwriting a trust deed investment was simpler because it was hard to imagine prices could drop further.

Real estate prices in the Southern California market were already below cost. Though downward pressure on price was conceivable, the prices would eventually have to increase to the cost of building the property, at the very least. Thus, from an underwriting standpoint, it was much easier to analyze value and risk in a given trust deed investment.

Fast forward to today where we have had a 6% increase in home values nationwide, from February 2012 to February 2013. This makes the importance of analyzing true value more important than ever.

Investors are more numerous which has decreased annual yields and increased the maximum loan-to-value possible. These facts add to the risk of any potential investment. Less yield and higher loan-to-value makes the proposition less appetizing, but still a great investment if analyzed properly.

On top of that, these very same trust deed investors have expressed increased interest in the buying and selling of the real estate asset itself. This fact makes an investor even more willing to assume greater risk because they’re partially analyzing the transaction as if they might be purchasing the property themselves.

Overall, given the increased risk, private money financing is still readily available for quality transactions nationwide. Expect a more careful analysis of each potential transaction though. Knowing this can help borrowers and brokers alike in packaging their transaction for investor approval.